Secondary Sources: Value of Bankers, Fed and Bubbles, Paul Samuelson

Value of Bankers: Writing for the Money Supply blog, Chris Giles looks at a report that says bankers’ value to society is negative. “To me, the report is a perfectly sensible attempt to describe the externalities — the difference between the private value and the social value — that are embodied in different jobs. But it is combined with numbers that appear to be complete guesses alongside some horrible howlers. For example, attributing a very high social value to nursery workers because they enable higher labor supply is entirely wrong, since that value is not captured by society but by the mothers and fathers who work and earn money. But the underlying idea is sound and the implication is clear. It is a perfectly reasonable task of governments to discourage jobs where social value is less than the private value and vice versa. By this logic, if the social value of a job is strongly negative, it should be outlawed.”

Fed and Bubbles: On Econbrowser, James Hamilton looks at whether the Fed should do more to fight bubbles. “It is hardly the role of the Fed to be deciding that it knows better than the market what the price of every asset should be. Nevertheless, I think it is necessary for the Fed at least to be forming an opinion about what’s driving asset prices as one input into the Fed’s decision making. Booming U.S. real estate prices were accurately signaling that there was a problem with both the interest rate target and financial supervision, and it’s desperately important to ensure that this same mistake is never repeated. Of course, it’s easy enough to say what should have been done in 2004, but the real challenge is figuring out what to do in 2010. Are commodity prices experiencing a bubble right now, and if so, is it something the Fed needs to stop? To me, the evidence suggests that U.S. interest rates are an important factor in recent movements in relative commodity prices. I also believe that further big increases in commodity prices could be destabilizing for the real economy. Nevertheless, other economic objectives take precedence at the moment, and it is too early to start raising rates yet. But it is not too early to remember that there are limits to how much you can help the U.S. economy by keeping interest rates low. I suggest watching commodity prices in the months ahead as one practical guide for acting on that wisdom.” Separately, add Mort Zuckerman to the list of people backing Fed independence.

Prescient Samuelson:Paul Krugman notes something that the late Paul Samuelson wrote in 1948. Krugman quotes: “Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid… In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods.”

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